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Warning Flags Flutter On Economy

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Another worrying (and bearish) economic article, this time from the Christian Science Monitor:


Here's a quote:

The Fed is concerned over the rapid expansion of nontraditional mortgages, such as interest-only loans and those where the size of the loan grows, rather than shrinks. The Fed and other US financial regulators have produced a draft "supervisory guidance" for participants in the US mortgage market. A final version of this guidance, when it emerges, could constrain the home-mortgage market later this year, Mr. Malmgren warns. Similarly, regulators are trying to tame the market for risky loans linked to commercial real estate.

In the international sphere, the Fed and banking regulators in Britain and other nations worry about the rapid expansion in recent years of high-risk "credit derivatives," now in the trillions of dollars. Such derivatives are often built around repackaging existing debt.

"Most of this market is concentrated in a little more than one dozen financial institutions, posing potential systemic risks on a scale never before experienced," Malmgren says in a monthly commentary. These financial instruments spread the risk of these loans among various creditors (hedge funds, insurance companies, pension funds, etc.). That's useful. But it doesn't eliminate the risk from rising interest rates or recession, he says.

"The Fed and other regulators have grown nervous about the proliferation of financial innovations as well as the types of market participants," Malmgren writes. As the world economy slows, "exits from these illiquid assets may get crowded from time to time."

Kasriel also sees serious derivative risks in the "highly leveraged global economy" as central banks in Europe and Japan join the Fed in raising interest rates from an "abnormally low" level.

And another:

The shrinking real estate bubble

"We are seeing the end of the bubble," says Dean Baker, codirector of the Center for Economic and Policy Research in Washington. "How quickly and how much [prices fall] remains to be seen.

Signs of a weakening housing market include a fall in housing starts last month, a five-month-long slump in existing home sales, and a 15 percent drop in mortgage applications from a year ago.

The average interest rate on a 30-year fixed-rate mortgage has risen from 5.3 percent in June 2003 to 6.5 percent - enough to boost mortgage payments sizably. More and more people with adjustable rate mortgages will not be able to afford the new payments and will have to sell, says Baker.

Residential construction accounts for 6 percent of gross domestic product. Real estate agencies employ 1.5 million people. If house prices decline, homeowners will be less likely to draw money out of their home equity to buy goods and services. Further, if housing starts of 2.1 million in 2005 fall to the 1.2 million to 1.3 million level common in the 1980s and '90s, this "could throw the economy into a recession," says Baker.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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